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Venezuela's Oil Output Crumbles

CARACAS, Venezuela -- Venezuela's oil output is collapsing, making it unlikely the South American country can benefit from rising global prices for oil and increasing the chances of a debt default this year that could turn its economic crisis into a humanitarian disaster.

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Production fell 440,000 barrels a day to 1.8 million barrels in the 12 months to November, according to official statistics. The nearly 20% decline so far ranks among the deepest in the industry's history. Russia's output slid 23% during the fall of the Soviet Union and Iraq's output dropped by the same share after the 2003 U.S. invasion, according to data from OPEC and BP Statistical Review.

The collapse has been triggered by a deep economic crisis and widespread corruption and mismanagement, compounded by a purge of state-run Petroleos de Venezuela SA by President Nicolás Maduro that has paralyzed the oil giant. U.S. sanctions have scared off some of the last remaining investors.

"In Venezuela there is no war, nor strike, but what's left of the oil industry is crumbling on its own," said Evanán Romero, a former PdVSA director.

Since the country exports little else, Venezuela's centrally planned economy relies on oil exports for 95% of its hard currency, according to the latest official data. That means the output decline will add more pressure to the government, which has drastically cut back on imports of everything from machinery to food and medicines to make ends meet. The economy has shrunk an estimated 40% in the past four years. Malnutrition is spreading among the young and elderly while health officials report a resurgence of illnesses ranging from malaria to diphtheria.

Venezuela is also entering the world's first episode of hyperinflation in a decade. Prices rose an estimated 2,600% last year, the country's National Assembly estimates. Nearly one in four factories didn't reopen after Christmas, according to the local industry association. And at least four people have died in looting outbreaks across the country in recent weeks.

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This week, the state oil company's new chief, National Guard Gen. Manuel Quevedo, blamed the downturn on sabotage and terrorist attacks by the opposition, without providing any evidence. He said production has stabilized and will grow to 2.5 million barrels per day this year.

Most analysts, however, expect Venezuela's production to continue falling, adding to the country's economic woes.

"The only discussion right now is how much is it going to decline by. There is no talk of a turnaround," said Luisa Palacios, analyst at consultancy Medley Global Advisors in New York.

The output decline means Venezuela has been the only major oil producer to not benefit from rising crude oil prices. The value of the Venezuelan oil export basket rose 25% last year on the back of stronger global demand and shrinking inventories. But this windfall was wiped out by lower output and the rising cost of oil products imported by PdVSA to aid its operations.

Brokerage Torino Capital forecasts that the value of Venezuelan oil exports will fall about three billion this year to $26.5 billion. As recently as 2012 the country earned $93 billion from oil exports.

The country has already been struggling to pay interest and principal on its $60-billion foreign debt. A full-blown default would deepen the country's woes, potentially putting oil sales at risk.

PdVSA and the central government are in default on more than $700 million of bond payments. The state oil company hasn't made any interest payments for a month, raising fears that creditors could start seizing oil shipments as compensation.

Last week, a tanker carrying Venezuelan crude was detained in the Caribbean island of Curaçao at the request of an unidentified group of investors seeking $30 million in back payments from Venezuela, according to diplomats familiar with the matter

"If Venezuela's oil shipments become a target, that would be the worst possible scenario for the country's oil industry," said Artyom Tchen, an Oslo-based oil analyst at consultancy Rystad Energy.

The crisis has created a vicious cycle of underinvestment and falling output, which cripples the economy further. PdVSA's operational spending has fallen two thirds from 2014 to 2016, according to the latest official data.

The cash crunch comes as Mr. Maduro faces elections sometime this year. As oil production falls, it will become increasingly difficult for the president to maintain handouts of imported food to supporters, which has kept his ruling party in power amid an economic meltdown, said Siobhan Morden, strategist at Nomura Securities.

Part of the problem is that some 1.3 million barrels a day of Venezuelan oil is already spoken for between the domestic market and pre-paid supply and debt deals with allies Russia, China and Cuba, said Mr. Monaldi. That leaves precious little to sell in the open market.

Making matters worse, Mr. Maduro's government jailed almost 70 senior managers on graft allegations in the past three months, appointing half a dozen generals with no industry experience to run the firm.